Question or Topic 

You may contact Bob Parrish by email, USA Mail, Fax, telephone or request a meeting

The Question: If the seller pays closing costs, how are those treated on the federal income tax return(s)?

Objectives

Related Articles

The Answer

I am selling my rental property and was asked to pay the buyer's closing costs. Is all or part of the costs deductible for me?

In computing your gain or loss on the sale, reduce your proceeds from the sale by your selling expenses, including the buyer's closing costs that you agree to pay.

Points paid by the seller: The term points includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 

Treatment by seller The seller cannot deduct these fees as interest; but they are a selling expense that reduces the seller's amount realized. See Publication 523 for more information. 

Treatment by buyer: The buyer treats seller-paid points as if he or she had paid them. If all the tests under Exception (discussed earlier) are met, the buyer can deduct the points in the year paid. If any of those tests is not met, the buyer must deduct the points over the life of the loan. 

The buyer must also reduce the basis of the home by the amount of the seller-paid points. For more information about the basis of your home, see Basis, later.

If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.

The only settlement or closing costs you can deduct are home mortgage interest, certain points and certain real estate taxes. You deduct them in the year you buy your home if you itemize your deductions. You can add certain other settlement or closing costs to the basis of your home. There are some settlement or closing costs that you cannot deduct or add to the basis.

Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home.

You can include in your basis the settlement fees and closing costs that are for buying your home. You cannot include in your basis the fees and costs that are for getting a mortgage loan. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

I purchased a rental property last year. What closing costs can I deduct?

Settlement fees and closing costs for buying the property are part of your basis in the property. These include:

• Abstract fees,
• Charges for installing utility services,
• Legal fees,
• Recording fees,
• Surveys,
• Transfer taxes,
• Title insurance, and
• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Solutions

Solutions are dependent upon facts & circumstances, law and the objectives.  These elements vary from one time to another, from one circumstance to another and from person or entity to another.

Kit to Prepare for Your Adviser

 Engagement Status Letter ~ WARNING!

Navigation

    Privacy Statement

Email Bob; Write a Letter to Bob; Fax Bob; Call Bob; Bob Parrish CPA, P.C. Warning;